\begin{abstract}
  This paper studies technological progress in the energy sector and
  the transition path from fossil fuels to renewable energy, with a
  particular emphasis on the consequences for the whole
  economy. Currently, there is an active discussion regarding
  subsidizing renewable energy sources, which are often portrayed as
  the sole future source of energy and the driver of significant
  employment and economic growth. However, innovation in the fossil
  fuel sector and its continuing development can also be a game
  changer and should not be ignored.

  In the paper, we use a dynamic general equilibrium model of a neoclassical growth economy with
 endogenous technological progress in energy production to study the
  optimal transition from fossil fuels to renewable energy. We emphasize the importance of modeling
  technology innovation in the fossil fuel sector, as well as in the
  renewable energy industry.  Advances such as shale oil and gas, oil
  sands production in Canada, the pre-salt discoveries off Brazil, and
 new deep water exploration and production technologies increase the supply of fossil
  fuel and imply that the “parity cost target” for renewables is a
  moving one.  At the same time, innovations in internal combustion
  engines or gas-fired power generation technologies, for example, also
  enhance the competitiveness of fossil fuels.  We believe that this
  important observation is often neglected in policy discussions. 

  Our quantitative analysis finds that the transition to a renewable
  energy regime will not occur until 89 years from now. At that time,
  about 80\% of the technically recoverable fossil fuel resources in
  place will be exploited. Toward the end of the fossil fuel regime,
  the price of energy jumps substantially. It peaks at the switch time
  and is more than double current levels for over 75 years after the
  transition. The consumption share of output plunges from around 60\%
  to below 40\%  at the switch date. In this sense, our model predicts an ``energy
  crisis'' around the switch point, and the economy will take 150 years or so to
  recover. Nevertheless, the energy crisis is efficient and does not provide any opportunity for policy actions to improve market outcomes.  

\end{abstract}
